Ares Capital's Q2 2025: Unraveling Key Contradictions in Yield Trends, Tariff Exposure, and Market Activity

Yield and spread trends, tariff exposure estimates, impact of market uncertainty on activity, capital injection into Ivy Hill, and dynamic spread and fee trends are the key contradictions discussed in Ares Capital Corporation's latest 2025Q2 earnings call.



Stable Financial Performance Amid Market Volatility:
- Ares Capital Corporation reported stable core earnings of $0.50 per share for the second quarter, representing an annualized return on equity of 10%.
- The company's net asset value per share increased both sequentially and year-over-year, supported by earnings in excess of the dividend and robust net investment gains.
- This stability was attributed to the company's resilience and ability to transact in varying market conditions amid tariff-related volatility.

Increased Financial Flexibility and Leverage:
- Ares Capital issued $750 million of long 5-year unsecured notes at a new issue spread of 175 basis points, marking the tightest such spread achieved by a BDC since the beginning of the second quarter.
- The company upsized its largest revolving credit facility by $880 million, bringing the total facility size to $5.4 billion, with a reduced drawn spread by more than 20 basis points.
- This maneuvering allowed for increased financial flexibility, positioning Ares Capital to seize opportunities in the market despite reduced leverage levels.

Strong Portfolio Performance and Non-Accrual Management:
- The company's portfolio experienced healthy overall performance, with weighted average organic EBITDA growth rates accelerating into the double digits over the last 12 months, and borrower leverage levels below the 5-year average.
- Non-accrual rates increased modestly at cost from 1.5% to 2%, but remain well below historical averages and industry peers.
- The robust credit performance is due to the company's experienced portfolio management team and strategy of investing across the capital structure.

Expansion of Equity Co-investments and Realized Gains:
- Ares Capital exited several of its equity co-investments, realizing a 3x multiple of initial invested capital and a gross realized internal rate of return in the mid-20% range.
- This realization contributed to net realized gains of $117 million on investments during the second quarter, with cumulative net realized gains since inception nearing $900 million.
- The strategy of building a diversified portfolio has allowed Ares Capital to offset losses with significant gains, enhancing overall financial performance.